Investment Advisor Financial Investment 2

Question 1

An investor holds a bond with a 5% coupon rate when market interest rates rise to 7%. What happens to the bond's market price?

Accepted Answer

It falls below par value

Answer

Bond prices move inversely to interest rates; when rates rise above the coupon rate, the bond becomes less attractive and trades at a discount.

Question 2

Which metric measures the percentage of a company's earnings paid out as dividends?

Accepted Answer

Payout ratio

Answer

The payout ratio is calculated as dividends per share divided by earnings per share, expressed as a percentage.

Question 3

A mutual fund with a 12b-1 fee primarily uses that fee to cover:

Accepted Answer

Marketing and distribution costs

Answer

12b-1 fees are SEC-authorized charges used to pay for a fund's marketing, advertising, and distribution expenses.

Question 4

What does the Sharpe ratio measure?

Accepted Answer

Risk-adjusted return per unit of total risk

Answer

The Sharpe ratio divides a portfolio's excess return over the risk-free rate by its standard deviation to measure return per unit of risk.

Question 5

An investor in the 32% marginal tax bracket compares a municipal bond yielding 3.5% to a taxable bond. What taxable equivalent yield does the muni represent?

Accepted Answer

5.15%

Answer

Taxable equivalent yield = muni yield / (1 - tax rate) = 3.5% / (1 - 0.32) = 5.15%.

Investment Advisor Practice Test

Investment Advisor Practice Test

Investment Advisor Financial Investment 2